Salary sacrifice arrangements have become increasingly popular as a way for employers to offer attractive benefits while potentially reducing both employer and employee tax and National Insurance contributions.
However, in 2017, new rules were introduced that created a complex web of regulations that require careful navigation.
What is salary sacrifice?
Salary sacrifice is an arrangement where an employee agrees to give up part of their contractual salary in exchange for a non-cash benefit provided by their employer. The employee’s gross pay is reduced by the value of the benefit, which can result in tax and National Insurance savings for both parties.
The arrangement must be a genuine contractual variation, not simply a retrospective adjustment after benefits have been provided. This means the employee’s terms of employment must be formally amended to reflect the reduced salary.
The 2017 game changer – Optional Remuneration Arrangements (OpRA)
In April 2017, the government introduced significant changes through what are known as the “optional remuneration arrangement” (OpRA) rules. These rules fundamentally altered how most salary sacrifice benefits are taxed, with the aim of reducing the tax advantages previously available.
Read our full Payroll Simplified blog about Optional Remuneration Arrangements.
What changed?
Under the new rules, employees are generally taxed on the higher of:
- The cash equivalent of the benefit provided, or
- The amount of salary sacrificed
This means that for many benefits, the tax advantages of salary sacrifice have been largely eliminated. However, crucially, National Insurance savings can still apply in many cases, as the OpRA rules don’t affect NI treatment in the same way.
Exempted benefits
Several benefits remain exempt from the OpRA rules and continue to enjoy full tax and National Insurance advantages:
Pension contributions: Contributions to registered pension schemes remain fully exempt, making them one of the most valuable salary sacrifice options available.
Cycle to Work schemes: Bicycles and cycling safety equipment provided through government-approved schemes retain their preferential treatment.
Ultra-low emission vehicles: Company cars with CO2 emissions of 75g/km or less (reducing to 50g/km from April 2025) are exempt from the OpRA rules.
Childcare: Workplace nurseries and childcare vouchers (though new voucher schemes closed to new entrants in October 2018, replaced by Tax-Free Childcare).
Mobile phones: One mobile phone per employee remains exempt.
Workplace charging for electric vehicles: Charging facilities provided at the workplace are exempt.
Impact on employees
There are a number of implications for employees under the OpRA rules. It is essential that these are understood by employees and communicated to them.
Under OpRA rules, employees may not see the income tax savings they might expect from salary sacrifice for most benefits. However, they may still benefit from National Insurance savings, which can be significant.
Employees typically save 8% (or 2% above the upper earnings limit) National Insurance on the sacrificed amount, even for benefits caught by OpRA rules.
Pension benefits remain highly tax-efficient, with full relief from both income tax and National Insurance on contributions.
What does it mean for Employers?
Employers also benefit from savings on the 15% Employers’ National Insurance on the sacrificed salary amount, even for benefits subject to OpRA rules.
There are, however, administrative considerations, and Employers must ensure proper documentation and payroll adjustments are in place.
Well-structured salary sacrifice schemes can still be valuable employee benefits, particularly for exempt benefits like pensions and have a positive impact on attracting and retaining staff.
Don’t fall foul of National Minimum Wage compliance
One of the most critical compliance issues with salary sacrifice is ensuring that employees’ reduced salary doesn’t fall below the National Minimum Wage (NMW) or National Living Wage rates.
Staying compliant
With increases to National Minimum Wage rates, employers must monitor and regularly check that post-sacrifice salaries meet the minimum wage requirements, especially since NMW rates apply to different age brackets and apprenticeship statuses.
This requires careful tracking, and detailed records must be maintained that show the original salary, sacrifice amounts, and final pay to demonstrate NMW compliance.
Another common area employers trip up is the fact that NMW calculations are based on pay reference periods, typically monthly. This necessitates ongoing monitoring rather than just initial compliance checks.
Practical Considerations
When wages are close to minimum wage levels, salary sacrifice arrangements may become impractical or impossible to implement. Employers should build in safeguards to automatically suspend or adjust sacrifice arrangements if minimum wage compliance is threatened.
Salary sacrifice options worth considering
Pensions
Despite the 2017 changes, pension salary sacrifice remains highly attractive due to its exemption from OpRA rules.
Benefits for employees
- Full income tax relief on contributions
- National Insurance savings of 8% (or 2% above upper limit)
- Increased net take-home pay against making pension contribution through a net pay arrangement, for example
- Enhanced pension contributions through employer NI savings
Benefits for employers
- 15% National Insurance savings on sacrificed amounts
- Potential to reinvest savings into the employees’ pension fund enhancing the pension contributions
- Valuable recruitment and retention tool
- Simplified pension administration through single payment routes
Implementation considerations
- Minimum pension age restrictions
- Annual and lifetime allowance implications
- Impact on other benefits linked to salary levels
- Auto-enrolment compliance requirements
Cycle to Work schemes
The Cycle to Work scheme remains one of the most popular exempt benefits, allowing employees to obtain bicycles and safety equipment through salary sacrifice.
Key Features
- Exempt from OpRA rules for bikes and safety equipment
- Typically structured as hire agreements with option to purchase
- Maximum benefit value varies by scheme provider
- Both tax and National Insurance savings available
- Environmental and health benefits align with corporate sustainability goals
Compliance Requirements
- Must be primarily for commuting to work
- Proper hire agreement documentation required
- Fair market value assessments for final purchase options
- Scheme must be open to all employees
Electric vehicles and ultra-low emission benefits
The government’s push toward environmental sustainability has created favourable tax treatment for ultra-low emission vehicles through salary sacrifice.
Current Rules
- Vehicles with CO2 emissions of 75g/km or less are exempt from OpRA
- Threshold reduces to 50g/km from April 2025
- Includes pure electric vehicles and some plug-in hybrids
- Workplace charging facilities also exempt
Future Considerations
- Benefit-in-kind rates for electric vehicles remain very low
- Company car tax advantages complement salary sacrifice benefits
- Infrastructure requirements for workplace charging
- Residual value considerations for lease agreements
Practical implementation tips
Documentation and contracts
Genuine contractual variations must be established before benefits commence, with records clearly showing both the original and varied contract terms. It’s essential to maintain comprehensive documentation that demonstrates the voluntary nature of the arrangement and includes provisions for varying or terminating the arrangement as needed.
Payroll integration
Payroll systems need to be capable of handling complex sacrifice calculations while incorporating National Minimum Wage compliance checks. The system should accommodate multiple sacrifice arrangements per employee and account for the impact on other salary-related calculations such as pension contributions and life insurance premiums.
Communication and education
Employees require clear explanations of how salary sacrifice arrangements operate, including both the benefits and any limitations under OpRA rules. It’s crucial that employees understand their ongoing commitment to these arrangements, with regular reviews and updates provided as circumstances change to ensure continued understanding and compliance.
Future salary sacrifice developments
There are several areas to watch in the world of salary sacrifice, where things never stay the same for long!
Environmental focus
- Potential expansion of exempt benefits for environmentally friendly options
- Possible changes to emission thresholds for vehicles
- New benefits relating to sustainable transport and energy
Digital benefits
- Ongoing review of technology-related benefits
- Potential changes to mobile phone and equipment benefits
- Consideration of home working equipment and broadband
Pension policy
- Continued government support for pension saving incentives
- Potential changes to pension tax relief structures
- Auto-enrolment contribution increases
Salary sacrifice remains a valuable benefits tool
Salary sacrifice arrangements remain a valuable option for both employers and employees. The key to success lies in understanding which benefits retain their tax advantages and ensuring robust compliance procedures are in place.
For employers considering implementing or reviewing salary sacrifice arrangements, the focus should be on:
- Ensuring full compliance with minimum wage requirements
- Concentrating on exempt benefits where genuine tax advantages remain
- Maintaining proper documentation and procedures
- Providing clear communication to employees about the real benefits available
Success in this area requires ongoing attention to regulatory changes, careful administration, and a clear understanding of the complex interplay between tax, National Insurance, and employment law requirements. When done correctly, salary sacrifice can continue to provide valuable benefits for all parties involved
while maintaining full compliance with HMRC requirements.
The landscape may be more complex than it was pre-2017, but opportunities for tax-efficient employee benefits certainly still exist for those who navigate the rules carefully and professionally.
